MEMO To: Dr. Byrnes Shouldice, Alan O’Dell From: An MBA Student Date: May 09, 2006 ————————————————- Subject: Problems and Plans – Operational Assessment of the Shouldice Hospital Thank you for the opportunity to consult on your Shouldice Hospital operational assessment. I understand that you have implemented a well developed focus strategy (market focus and internal focus) successfully and Shouldice achieves outstanding results by maximizing the difference between perceived quality and value to the patient on one hand and the cost of supplying services on the other.
The nurses and doctors treat their patients with care and understanding and treat them more like family members. This has led to the high level of praise for this hospital and its treatment. The rising number of satisfied patients and word of mouth referral has led to demand for the facilities services which outstrip the facility’s current capacity. I understand that you are looking for guidance on specific actions in order to increase the hospital’s capacity while at the same time maintaining control over the quality of the service delivered, and the hospital management.
I have identified the problems and offered a list of alternate courses of action. Problem Definition: The problem is that Shouldice is facing a paradox of change. Shouldice is operating at its “best operating level” for a service company with limited flexibility in its facility, a specialized work force but are failing to meet all the demand for its chosen market niche. Adding additional capacity to meet the unmet market need may upset the existing work force and lower service quality. Failing to meet the market demand may invite competition that could eventually cause Shouldice to lose market share and end up with excess capacity.
Problem Justification: It is assumed that they are operating at the “best operating level” because the way the case describes how efficiently the hospital is ran and how the patients appear to be pleased with their treatment. Capacity is nearly 100% full if they do 30 operations a day and the patients stay 3-4 days. This would fill up 89 beds for a 5 day work week. They also have 15% (14 hostel rooms) additional capacity for peak times. This also works out to be about 70% capacity of their full time potential of 7 days. 70% of maximum capacity is the best operating point.
To increase it rate of service utilization will decrease the service quality. For capacity analysis, refer to Appendix-B. To increase their output and maintain their quality they would need to increase the size of the hospital. This involves large capital investments and considerable time. Construction would also cause a disruption to the quality and country club atmosphere of the hospital. Due to shift restrictions the current operating rooms are completely un-utilized for 2 days of the week as well as 15. 5 hours of each weekday.
Kitchen and common area are designed to accommodate one hundred patients and it is important that these facilities be kept up to ensure patients still receive the high level of satisfaction with the experience at Shouldice. The staff also has limited flexibility. Surgeons and surgeons’ assistants are specialized fields that have limited desire to be cross trained. It is assumed that the staff is happy with the existing work schedule and do not want a change. Increasing the days worked would cause more aggressive scheduling of the operating rooms and may make it hard to maintain the same kind of working relationships and attitudes.
Alternative Courses of Action: Alternative courses of action are based on the assumption that the reason for their desired expansion is to meet an unmet market demand. i) They could add an additional day by operating on Saturday. ii) They could do nothing different and continue to do as they are currently doing. iii) They can add a new floor (i. e. 45 i. e. 50% more hospital beds). iv) They can meet the unmet market demand with external capacity (establish a new facility). v) They can utilize the current facilities during some of its present idle time. Evaluate alternatives and make decisions: ) Adding an additional operating day on Saturday is a valid consideration. It would utilize ideal hospital capacity. It could increase the number of patients served by 9% or 800 patient a year. Would this be a sufficient number of patients served to keep competition from entering the same market is unknown. Adding a Saturday is also assumed to have a negative impact on the work force that drive down the quality that gives Shouldice a competitive advantage. It would increase rate of service utilization beyond 70%. This could be offset by hiring addition staff.
But one should consider the time it takes the new staff to come up the efficiency curve. For capacity analysis and financial details refer to Appendix-C. ii) Doing nothing is a valid consideration. Their existing system and reputation sets them apart as a market leader and it is assumed to be a profitable setup. If it is working do not try to fix it. We assume that the existing set up is acceptable to management as far as profit and other operating measures. The assumed risk is if they do not do anything then competition will enter the market place and could eventually take patients away from Shouldice.
There is insufficient data presented to truly analyze this risk. iii) Increasing the number of bed by 50% would not be advisable unless they added more doctors and surgery rooms because the existing plant capacity and number of doctors could not fill an addition 45 beds. They would be operating the surgery rooms at over capacity. The construction requires large capital investment, time, and would disrupt the country club atmosphere. For capacity analysis and financial details refer to Appendix-D. iv) Meeting the unmet market demand with external demand is a valid consideration. It could be done in several different ways.
They could look to other facilities that are similar and team with their doctors to train them in the Shouldice processes and share in the profits. This would help keep the competition out of the market and could be done as a silent partner until the service quality reaches a level that Shouldice would want to associate their name with the other facility. Another option would be to establish a new facility for Hernia. Another option would be to subcontract or franchise the operation. For merits and demerits refer to Appendix-E. v) Relieve the operating room bottleneck by utilizing the current facilities during some of its present idle time.
Addition of weekend or evening surgeries will increase throughput without any capital investment. Expand the facility’s kitchen and social area’s to accommodate the increased patient throughput and continue to provide a high quality patient experience for its customers Recommendations: I would recommend a combination of doing nothing with the existing staff and plant as to maintain the country club atmosphere and gregarious nursing staff that gives it its competitive advantage and meet the unmet market demand with external sources of capacity to keep the competition from entering the market.
I would be happy to elaborate on my recommendations in future correspondence. Sincerely, An MBA Student Appendix-A Cost comparison – Shouldice vs. Other Hospitals: Cost Items| Shouldice| Other Hospitals| Remarks| Costs of typical operations| $954*| $2000-4000| * Without general anaesthetic| Transportation(round-trip fares for travel to/from Toronto)| $200-600| $200-600 **| **No data available. Considered the same as Shouldice. | Time Lost from work in Hospital| 04 days| 05 days| |
Time lost from work while recovering| 05 days| 10 days| | Value of time lost (ranging from $50 to 500 per day)| $450-4500| $750-7500| | Total before Allowancefor recurrence| $1604-6054| $2950-12100| | Probability of Recurrence| 0. 80%| 10. 00%| | Expected Cost of Recurrence| $13-48| $295-1210| | Total cost to patient, employee and insurer| $1,617-6,102| $3,245-13,310| | Profitability of Shouldice Hospital & Clinic: Hospital: Items| Shouldice Hospital| Remarks| Revenues per year(4 days X $111/day x 6,850 patients/year)| $3,041,400| Charges for hospital stay = $111/day.
Operations per year = 6,850 (in 1982)| Cost per year| $2,800,000| | | | | Profit per year (A)| $241,400| | Clinic: Items| Shouldice Clinic| Remarks| Revenues per year(($450 + 60 + 75 X 0. 20) X6,850)| $3,596,250| Surgical fee=$450/operation. Fee for the assistant surgeon=$60. Fee for a general anaesthetic =$75. Operations per year=6,850 (in 1982)| Cost per year| $2,000,000| | | | | Profit per year (B)| $1,596,250| | Total (Hospital + Clinic) Profit per year (A+B)| $1,837,650| | Total Depreciated Assets = $5 million Return on Asset = $1,837,650/$5 million = 0. 36753 i. . 37% Appendix-B Current Capacity Analysis Current Throughput: * 6,850 Operations/50 weeks = average 137 operations/week with a peak of 165/week in September. Capacity Analysis: * Examination Rooms: (6 rooms x 3 hrs (1-4 PM) x 5 days x 60 min/hr) / (20 min / exam) = 270 patients /week = 54 patients/day. * Admitting Procedure: (2 people x 4 hrs (1-5 PM) x 5 days/week x 60 min/hr) / (10min/patient) = 240 patients/week = 48 patients/day. * Nursing Station: (2 stations x 4 hrs (1-5 PM) x 5 days/week x 60min/hr)/ (10 min/patient) =240 patients /week = = 48 patients/day. Operating Rooms: (5 rooms x 8. 5 hrs/room/day x 5 days/week)/ (1. 1 hrs/patient) = 187 patients /week = 37 patients/day. Average operation time = (82% x 45 min + 18% x 90 min) + 15 min file time = 68. 1 min/operation. * Surgeons: 12 surgeons x 3. 5 operations/day x 5 days = 210 patients/week = 42 patients/day. * Hospital rooms: 89 rooms = 147 patients per week (assuming 3. 5 days average stay, 3 days recovery and Monday – Wednesday admittance, No procedures on Saturday or Sunday only recovery and admittance) – 29 patients/day. 103 rooms (incld. 4 hostel rooms) = 161 patients (assuming 3. 5 days average stay, 3 days recovery and Monday – Wednesday admittance, No procedures on Saturday or Sunday only recovery and admittance and use of 14 “hostel” rooms for two nights each week) – 32 patients/day. Current: Check-in day| Beds Required| | Monday| Tuesday| Wednesday| Thursday| Friday| Saturday| Sunday| Monday| 30| 30| 30| 0| 0| 0| 0| Tuesday| 0| 29| 29| 29| 0| 0| 0| Wednesday| 0| 0| 29| 29| 29| 0| 0| Thursday| 0| 0| 0| 29| 29| 29| 0| Friday| 0| 0| 0| 0| 0| 0| 0| Saturday| 0| 0| 0| 0| 0| 0| 0| Sunday| 30| 30| 0| 0| 0| 0| 30| | | | | | | | Total Number in Hospital| 60| 89| 88| 87| 58| 29| 30| Total number of patients per week| 147| Appendix-C Adding an additional operating day on Saturday Use current 89 beds + 14 hostel rooms. Consider 3. 5 days average stay. Total number of patients per week = 180. Current throughput = 137 operations/week (refer to Appendix-B). Theoretical throughput = 161 patients/week (refer to Appendix-B). So, new throughput = (137/161)*180 = 153 patients/week. Therefore, additional patients per week = 153 – 137 = 16 Additional patients per year = 16*50 = 800
Additional revenue = 800*(450+75*0. 20) = $372,000 Total cost = $124,250 Therefore, Net increase in profit = $372,000 – $124,250 = $247,750 for no additional investment. Demerits of this alternate action: * Require to schedule 23-25 operations on Saturday. * Six surgeons and a supervising surgeon have to work on Saturdays. * Additional other personnel (an anesthetic, nurses). * Violates the implied contract that Shouldice has with its surgeons, strong opposition by the senior doctors. * Operating close to the theoretical capacity of the facility. Merits of this alternate action: No investment is needed. * Can still maintain quality service. Appendix-D Increasing the number of bed by 50% Current number of beds: 89 Add in a new floor (expand the capacity by 50%) at the cost of $2 million: 45 beds Total beds = 89+45 = 134 Total number of patents per week = 210 Current throughput = 137 operations/week (refer to Appendix-B). Theoretical throughput = 161 patients/week (refer to Appendix-B). So, new throughput = (137/161)*210 = 179 patients/week. Therefore, additional patients per week = 179 – 137 = 42 Additional patients per year = 42*50 = 2100
Additional revenue = 2100*(450+75*0. 20) = $ 976,500 Total cost = $176,500 Profit = $ 976,500 – $176,500 = $ 800,000 Therefore, Return on investment (ROI) = $800,000/$2,000,000 = 40% Demerits of this alternate action: * Require to schedule doctors to the full capacity of five days per week * Increase work load on admissions, kitchen, laundry, housekeeping and accounting * Further staggering of meal hours for patients (100 seat dining room) * Disruption during construction * Expensive Merits of this alternate action: * Easy to control and maintain quality Retain the culture and environment Addition of 45 beds: Check-in day| Bed Required| | Monday| Tuesday| Wednesday| Thursday| Friday| Saturday| Sunday| Monday| 42| 42| 42| 0| 0| 0| 0| Tuesday| 0| 42| 42| 42| 0| 0| 0| Wednesday| 0| 0| 42| 42| 42| 0| 0| Thursday| 0| 0| 0| 42| 42| 42| 0| Friday| 0| 0| 0| 0| 0| 0| 0| Saturday| 0| 0| 0| 0| 0| 0| 0| Sunday| 42| 42| 0| 0| 0| 0| 42| | | | | | | | | Total Number in Hospital| 84| 126| 126| 126| 84| 42| 42| Total number of patients per week| 210| Appendix-E Meeting the unmet market demand with external demand – Establish a new facility
Merits of establishing a new facility: * New location close to current setup, say a major city (New York) in USA * Improve its competitive position and increase its profits * Operate in a less restrictive environment * New Opportunities for existing personnel * Transfer of knowledge and expertise to the new facility. Demerits of establishing a new facility: * Requires a significant investment and time * Difficult to maintain Quality control * Difficult to create the same culture and atmosphere * Potential competition with the existing facility
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